DOE Loan Chief on Solyndra, Tax Grants & 2011

Just about one year into his role heading up the Department of Energy’s loan program office, former venture capitalist Jonathan Silver believes the agency has come a long way from it’s first few years of neglect and delays. Today the loan program functions “as well as, and possibly better” than private counterparts, when you consider the scale and complexity of the projects it’s meant to support, Silver said in an interview this week.

Silver’s task is to oversee the application process, the analysis and the negotiations for loans and loan guarantees, and he’s also responsible for staffing and working to streamline the agency’s operation. Silver heads up three related programs: the Advanced Technology Vehicles Manufacturing, or ATVM, program, which provides low-interest direct loans for green car manufacturing projects, and two loan guarantee programs (sections 1705 and 1703).

A loan guarantee serves essentially as a promise by the government to make good on a loan if the company can’t, and typically enables better interest rates and lower costs than would otherwise be available to a company for project financing. We sat down with Silver in San Francisco this week to talk about changes, progress and challenges ahead for the loan program.

Solyndra: Not So Bad

The DOE announced its first loan guarantee — for Fremont, Calif.-based thin-film solar startup Solyndra — back in March 2009, about three years after Solyndra first applied for the funding (and several months before Silver came on the job). The company became a poster child for the Obama administration’s efforts to stimulate green job growth through investment in clean energy projects.

Asked whether he agrees more with the positive or negative takes on Solyndra’s decision, Silver said he believes reality is somewhere in between. “They were going to close Fab 1 at some point anyway,” he said, noting that the company has been able to take tools from the first plant for its new manufacturing facility.

White House Worries

In a memo sent in October and leaked last month, three White House advisers expressed concern about the DOE loan guarantee program in three areas. First, there is the potential for some funds to be lost if they’re not obligated to projects by the deadline. Second, the officials noted a risk that the program would be criticized for slow implementation. And third, they highlighted the potential for funds to be committed to projects that would have happened anyway, without government assistance.

Silver acknowledged that the program may face some risk in each of these areas, and others as well, commenting, “You can never say ‘zero risk.'” But he also emphasized that the loan program office is very close to using all of the credit subsidies under 1705, and if more funding became available, “we could use that too.”

Tax Grants Key for Big Projects

An incentive program that allows renewable energy developers to get cash grants in place of tax credits is an essential piece of the puzzle for financing these large-scale energy projects, according to Silver. Emphasizing that he was not speaking for the Administration at large, he said he sees the tax-grant program — which is known as 1603 and is set to expire at the end of this month — as a vital “sister program” with the loan guarantee programs.

“A vast majority of the applications that we have in incorporate 1603 cash grants, which are the monetization of the [investment tax credit].” he said. “You can do small projects with 1603,” Silver explained, “but you can’t do really, really large complex ones without a combination of the two.”

Extending the 1603 tax grants, which can provide a direct payment to developers for up to 30 percent of project investment costs, has become a top priority for the solar and wind industries. On Wednesday, Solar Energy Industries Association Rhone Resch called the program “the most important policy for continuing growth of the renewable energy industry in the United States.”

Investments On Track, Under the Gun

Far from worrying about losing non-obligated funds, Silver said the loan program office has issued term sheets for more projects than it actually has the budget to finance. (A term sheet details the terms and conditions under which the Energy Department may enter into a conditional commitment with the applicant.) Not every term sheet will lead to a final loan agreement, but according to Silver, there are “more solid projects in the queue than we have capital for.”

Regarding the perception that the loan guarantee program is plodding along slower than it should, Silver believes this criticism is outdated. From a “standing start,” with too few staffers and not enough institutional knowledge, said Silver, the program has reached “ramming speed,” with more than 165 people on staff and investments in as many as 23 projects.

As for the risk that the government will pour public dollars into projects that would have gone through without the assistance, Silver acknowledged that “private capital markets have come back for less complex projects,” including some solar and wind developments. As a result, he said, we’ll see fewer small and medium-sized wind deals coming out of the loan guarantee program.

Efforts to Streamline

At this point, said Silver, the loan program office typically takes a deal through the process “soup to nuts” in six months. His team has developed a group of templates that can be used to help streamline the process of issuing term sheets for different types of projects. Small wind projects generally fit one basic term sheet template, for example, while solar manufacturing projects fit another.

One factor contributing to a smoother evaluation process for loan guarantee applications, said Silver, has to do with the applicants themselves. Proposals are getting stronger and more sophisticated, he said, now that many applicants have learned what makes a good application.

In the biofuels sector, said Silver, the agency is seeing more partnerships between “producers and off-takers.” Partly as a result of these alliances, he said, the “first couple biofuels deals” will be announced, “shortly.” He declined to provide more specifics, but said biofuels will likely be among the next several loan guarantees. In the coming year, he said, we’re also likely to see “additional interest” in nuclear and “advanced fossil fuel technologies,” such as “clean coal” and carbon capture.

Auto Loan Update

When it comes to the ATVM program, which has provided loans for Tesla Motors, Fisker Automotive, Nissan, Ford, and Vehicle Production Group, the trend toward more sophisticated applications has not been as apparent as in the loan guarantee programs, according to Silver. “Projects under ATVM have not changed dramatically,” he said.

In general, they fall into three basic categories: battery technology, “price point” plays (vehicles that match a certain efficiency level to a certain price point) and special purpose vehicles (such as the natural gas powered vehicle designed for wheelchair access by the most recent ATVM recipient, Vehicle Production Group). “I don’t know how many will go through at the end of the day,” said Silver, “because you’ve got to be able to distribute, you’ve got to be able to sell, there’s got to be a channel strategy.”

Among the next several awards coming out of ATVM will be some component deals, according to Silver, and some “additional variations” on the types of projects that have already secured DOE loan commitments: electric and plug-in hybrid vehicle production, battery manufacturing and OEM factory retooling for more efficient models.

During 2011, said Silver, the loan program office will expand its focus on portfolio management. After all, Uncle Sam will have millions of dollars on the line for some of these projects for decades.